The Four Dimensions of Investing in Seniors Housing and Healthcare Real Estate
CNL Healthcare Properties II intends to strategically capitalize on several long-term shifts in the United States, which are combining to make seniors housing and healthcare real estate an attractive investment opportunity. Collectively, these can be thought of as the 4Ds.
The U.S. population is steadily getting older and living longer. This demographic trend will continue for the next several decades and will trigger corresponding shifts in the real estate required to house and care for aging residents. According to the U.S. Census Bureau, the seniors population will increase by more than 50 percent by 2030.1 During this period, approximately 11,000 people will turn 65 every day.2
The seniors population is anticipated to increase by 55 percent from 2015-20301
1 "Projections of the Population by Sex and Selected Age Groups for the United States: 2015–2060," Population Projections, U.S. Census Bureau, accessed March 31, 2017 (data as of December 2014).
2 Sandra L. Colby and Jennifer M. Ortman, “The Baby Boom Cohort in the United States: 2012 to 2060,” U.S. Census Bureau, May 2014.
Demand for Healthcare
As a result of demographic shifts and ongoing chronic illnesses, healthcare spending is projected to continue rising, both in absolute terms and as a percentage of the U.S. gross domestic product (GDP). National healthcare spending is projected to increase from approximately 18 percent of the GDP in 2015 to approximately 20 percent by 2026.3 This growing demand for care increases with age, and will drive the need for new medical office buildings, acute care and post-acute care facilities and other types of healthcare real estate.
Annual physician office visits increase significantly with age4
Similarly, the demand for seniors housing continues to rise. Yet, the new supply of these buildings is not keeping pace. In fact, a 284 percent increase in annual unit production is needed to address the projected demands for 2030-2035.5 It is important to note that industry growth projections also could increase competition and may impact the availability of real estate investments and suitable tenants.
Projected demand, limited supply growth in seniors housing5
Population demand is not the only factor in actual demand. In-home care or care outside traditional healthcare real estate facilities may impact the actual demand trend.
3 National Healthcare Expenditure Projections 2017 to 2026, Centers for Medicare and Medicaid Services, accessed Aug. 1, 2018. Projections of the breakdown of the U.S. GDP in 2026 will likely differ from actual results.
4 Healthcare Real Estate Outlook, JLL, 2018.
5 A Projection of U.S. Seniors Housing Demand 2015–2040, American Seniors Housing Association, Summer 2016.
Delivery of Care
Recent developments in the healthcare industry — including new technology and the reforms of the Affordable Care Act — are changing the way hospitals and physicians deliver care to patients. There is a greater emphasis on value and efficiency, as well as continued pressure to reduce healthcare costs and reduce exposure to Medicare and Medicaid reimbursements. As a result, healthcare providers are treating more patients in outpatient facilities rather than in hospitals. Approximately two-thirds of all surgeries no longer require an overnight hospital stay, thus impacting the need for available real estate.6 For example, greater outpatient care requires far more facilities such as medical office buildings and surgical care centers, which intend to be more convenient and are often preferred by patients.
Outpatient surgeries have increased more than 30 percent over the past two decades6
6 Trendwatch Chartbook 2018, American Hospital Association, 2018.
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While many real estate sectors are impacted by macro-economic events that cascade down to a particular market, seniors housing and healthcare real estate is largely non-discretionary or “needs based,” mostly insulating it from economic drivers. This is why the healthcare employment growth rate has remained steady at approximately two percent per year, whereas all other sectors saw a change in employment numbers that mirrored economic trends over the past decade.7 In addition, investments in seniors housing real estate assets have proven to be a durable strategy as the average annual asking rent for seniors housing units has outpaced inflation.8,9
Steady growth of healthcare employment sector 7
The 2009–2016 average annual asking rent for seniors housing outpaced inflation.8,9,10
(Increasing rental rates may impact affordability for some residents.)
7 "Consumer Price Index," U.S. Bureau of Labor Statistics, accessed on March 13, 2018.
8 NIC MAP® Data Service, National Investment Center for Seniors Housing & Care, 4Q, 2017.
9 Consumer Price Index, U.S. Bureau of Labor Statistics, accessed on March 13, 2018.
10 This is not indicative of how an investment in CNL Healthcare Properties II will perform in relation to inflation. There is no assurance the asking rental growth rate will continue to increase or will not reverse itself in the future. Seniors housing rental rates have not outpaced the consumer price index growth rates for every calendar year. Trends for seniors housing rent growth rates differ based upon the supply and demand experienced in varying geographical regions.
There are significant risks associated with the seniors housing and healthcare sectors, including market risks impacting demand, competition from other entities, litigation risks and the cost of being responsive to changing government regulations. Favorable market conditions cannot provide any certainty that investors in a non-traded REIT will realize positive returns. Past performance is not indicative of future results. Factors could cause actual results to vary materially from those expressed in forward-looking statements.